Terry Mitchell

All about IRAs



Posted: Friday, February 27, 2009

by Terry Mitchell
http://commenterry.blogs.com

IRA stands for Individual Retirement Account. These types of accounts are personal savings plans. The best candidates for IRAs are those who are looking to save money for retirement.

An IRA works like this. You put a certain amount into an IRA. Only certain amounts are allowed under tax law. These amounts are known as contributions. Oftentimes tax deductions are given to people who invest in IRAs. Furthermore, any contributions you make to IRAs can accumulate in the account tax-free.

When you make a withdrawal from an IRA account, it is called a distribution. Distributions are taxed. If you withdraw money from an IRA account too early, the distribution is taxed more heavily. In other words, you will be penalized. The purpose of the IRA account is to allow a person to accumulate a large sum of tax-free funds in an account. A heavy penalty is put on the head of the person who tries to withdraw money from the account at the age of say 29 or 30, really anything earlier than the average retirement age which is somewhere between 59 and 65.

There are many types of IRAs. These include traditional, Roth, Simple, and educational IRAs. Traditional IRAs allow you to contribute up to 2000 per year. The tax deduction amount depends on a person's adjusted gross income. Another factor is whether or not you are already covered under on employee sponsored retirement plan. In some instances, you may be able to contribute to a traditional IRA, but still receive no tax deduction.

In a Roth IRA, money can be contributed. However, no tax deductions are allowed. An advantage to using a Roth IRA is that you accumulate without taxes, and distributions are also tax free. This is perhaps one of the most popular IRA plans.

For this reason, many people desire to convert traditional IRAs into Roth IRAs. There are some things to take into consideration before doing this. You can only convert to a Roth IRA if your income is $100,000 or less and you are single or married and filing jointly. In most cases when the question comes up of whether or not a person should convert to a regular IRA to a Roth IRA, the answer is yes. However, you should consider whether or not you are able to pay the taxes that will be placed on the conversion. Converting to a Roth IRA means that you will be paying tax on any earnings or pretax contributions.
 
Terry Mitchell is a software engineer, freelance writer, amateur political analyst, and blogger from Virginia, USA. He posts a least one article a day to his blog - http://commenterry.blogs.com - on subjects such as current events, politics, technology, society and culture, religion, health and well-being, self improvement, personal finance, trivia, and sports. He is also the owner of a new privacy-enhanced search engine - http://www.SearchMost.com.

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Top-level comments on this article: (2 total)
» left by Gary W. Halsey Sr.
 3 years 79 days ago.
51 fans.
Hi Terry, Wow, Now I know all there is to know about IRA's, but were affraid to ask. If I was planning on a retirement, I think I know which one I would have invested in if I had the chance to do it all over again, now that my friend (you) has told me about them in laymens terms that I can understand, would be the Roth IRA, wow, no taxes on the distribution either? That is great!!! I like the "contribution" - "Distribution", now it makes sense...where were you when I needed you?? hahahahahha, just kidding of course. I am one of those fortunate ones that worked for IBM for 30 years, retired in 2002, with full retirement benefits....I am as happy as a pig in mud, "why" you ask, because I am one of the last of a group of people that was able to retire under the old IBM retirement plan. Now, everybody has to invest into their own retirement 401k....I felt sorry for those folks, now they have to worry about medical (at least until they are 65), so I was lucky. I had to many years invested, and not enough time left for the 401K plan switchover, so there was a class action lawsuit for those of us over 25 years that we won in California, and IBM had to honor our initial retirement plan that was offered us when we were hired...cool huh? Great article, and a very informative read, thank you for sharing you knowledge...Your fan and friend in pen......Gary
» left by Terry Mitchell 3 years 79 days ago.
93 fans.
Gary, thanks for the comments. Yeah, the good ol' days of company-funded pensions and retirement medical benefits are over -- unfortunately! All we have left is to do it ourselves with 401(k)'s and IRAs and even those are dropping like a rock right now. Most members of your generation (with you being an obvious exception) don't know how lucky they are.
» left by Linda DeWitt
from Oregon 3 years 79 days ago.
Interesting article and it is a nice simplification. We are retired and have a fairly decent pension but we are watching our 401K dwindle daily even though it is managed by a reputabale company (I hope).
» left by Terry Mitchell 3 years 79 days ago.
93 fans.
Linda, thanks for commenting. It really doesn't whether your IRA is being managed by a reputable company or not, it has probably been losing money over the past 6 months and will continue to do so for a while. A low tide drops all ships.
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